Monday, April 14, 2014

Why outlet stores?

I just returned from the annual IIOC meetings in Chicago, where I saw an interesting paper on outlet stores of a national retailer that sells handbags.  (I am guessing it was Coach).

Their outlet stores have lower prices, are further from population centers (consumers travel 20 miles to get to an outlet stores instead of 9 to get to a regular store), and carry older products (16 months old vs. 10 months at regular stores).

A new paper suggests that outlet raise profitability by "crimping," a kind of price discrimination that prevents cannibalization of higher priced stores by making outlet stores unattractive to high-value consumers.

Since richer people have higher demand for nearby stores that sell newer products, the retailer can make more money (19% higher profit) by selling lower priced, older handbags at outlet stores located further from population centers.

If this makes you mad (see our earlier post, Only Schmucks pay Retail), then take the time to drive to an outlet store and purchase a lower-priced handbag.

8 comments:

  1. Interesting information. Thanks for sharing this.

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  2. Outlet malls are outside of the city since the land was cheaper. Now they tend to be even farther out, frequently in the middle of nowhere between two large cities, because once you’ve driven an hour to go shopping, you’re not going to go home without SOMETHING to show for it. Placing an outlet mall in the boonies “is a deliberate strategy. We have to work to get there, piling up hefty ‘sunk costs.’ All that time! All that gas!” Because it’s not simply a quick jaunt down to the corner store, we expect that the more we’ve put into the trip to get there, the more we must be rewarded with low prices. And while the outlets do offer low prices, these low prices are not on top quality, name-brand goods as their signs often boast. Many brands now have items that are manufactured solely for the outlet stores.
    http://www.moneycrashers.com/are-outlet-malls-worth-it/

    From a personal experience, I went to an outlet mall and bought a pair of pants at the size I would normally wear from the same manufacturer. However, when I tried on the pants, they were too small. Yes! Outlets have their own brand, less quality, and retail stores have their own, better quality. Referencing the Coach Outlet store, the main focus of selling a lot of bags, at a very reasonable price, but still having that idea of luxury. What a concept!

    Suzette McMillan, Empire State College, Dr. Singh, ECO 65155X

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    Replies
    1. The irony here is, at face value, consumers tend to believe that cheaper or lower cost always translates to higher consumer surplus. But unfortunately for many, they don’t analyze the big picture and take into consideration that the trade-offs might not be favorable. Even though consumers think they are getting a better deal on the bags by travelling 20 miles, they fail to realize that the assumed savings will be consumed by toll and fuel/travelling costs. So at the end of the day, it could be a zero sum gain. So the question then becomes, how much fuel would consumers burn in order to save a buck? Anyway, the retailers are enjoying big profit by driving the bigger portion of the demand to the outlets and maximize profit and the rich folks are paying more for the convenience of proximity. They are of course practicing product crimping which is another form of price discrimination technique. Essentially, they target a specific market demand of high elasticity and then adjust their prices to increase profit. Another example of price crimping is the subtle way in which American Airlines set up their air fare structure. On flights with a high proportion of full-fare passengers, American Airlines improves the quality of the meal service, thereby rewarding the full-fare passengers and squeezing the benefits, on average, discount flyers.
      Also in May 1990, IBM took advantage of product crimping by introducing the LaserPrinter E, an low-cost alternative to its very common and successful LaserPrinter. The LaserPrinter E was virtually identical to the original LaserPrinter, except that the E model printed text at 5 pages per minute (ppm), while the LaserPrinter could reach 10ppm (product crimping). Consequently by simply increasing the ppm and maintaining the same components of the printer, they are able to make big profit on the same product.

      Leo Palmer ESC Econ.

      Reference

      Chari Narasimha. Product crimping and price discrimination. Retrieved 3/16/15 from
      http://www.venchar.com/2003/12/product_crimpin.html



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  3. I totally agree on the assessment of how the brand name outlets use indirect pricing discrimination as not to cannibalize flagship brand stores. I know many people including myself who will not waste time at outlets stores especially for cloths or gifts. However, the original concept of outlet stores from the late 80s is a different concept on how they operate now. Originally, the outlet stores stocked irregulars, returns, and prior seasonal leftovers from the brand stores, which was also the underlying concept that drew consumers. This original concept transformed in the 90s and became an extension to the flagship stores but benefitted from economic zones created with government subsides that reduce construction and operating costs for commercial property owners who then pass the savings to the brand name stores.
    The outlet stores is a simple case of government allowing some international companies to operate as cartels under the disguise of an brand name outlet in government sponsors economic development centers that do not afford the same special status for smaller local or regional business

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  4. This is a very good example of price discrimination. Just like the post about Tide detergent, it could be said that Coach (retail) is creating a substitute product for itself in Coach (outlet). However, what is likely happening is that higher-end customers in big cities are paying an economic price of convenience for being close to a Coach full-price retail store. These customers are not going to go out of their way for a deal. However, because the outlet stores are removed from population centers, they probably attract a type of customer who otherwise never would shop at a Coach store.

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  5. I liked this concept, because I’ve seen it in action both here in Pennsylvania and in my home state of New York. In New York, I lived in Westchester County, home to every possible high end retailer. But by driving forty five minutes north, I could go to the Woodbury Commons outlets, which had stores like Coach and Neiman Marcus’ Last Call, as well as other outlets. Woodbury Commons is organized with many small stores outside, rather than the traditional mall setup, and has food vendors and the like. In short, it’s easy to “make a day” of going to Woodbury, and many people do. In fact, busloads of tourists take day excursions from New York City to buy the lower priced but still upscale items. I see the same thing here in Pennsylvania, with the outlets in Stroudsburg, also an hour or so away from a major city, this time Philadelphia.
    For me, quality matters more than name brand, but the name brands often have the better quality. My thirty dollar Target purse isn’t going to last me more than a year before I need to replace it, whereas some of the more expensive brands have a heritage factor and can be passed from parent to child, like Rolex. In addition to this being a classic example of price discrimination with regards to location, I’d say that the outlets also take advantage of the suburban location knowing that their local consumers would buy an item they might not normally consider, simply because of the “outlet” prices.

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  6. This was interesting to come across because I’ve never gave it a thought as to why outlet stores do exist. As I was reading this, it’s clear that the stores that participate at the outlet malls do contribute to indirect price discrimination. The stores who serve as the sellers, knowingly sell products to groups of buyers with different price elasticities of demand. At a local mall, retailers such as Coach and Guess which sell luxury handbags among other items are priced at an amount geared towards those that can afford such priced items. These handbags are generally of better quality than say a handbag one would buy from JCPenny’s for example. You can always find the most stylish handbag that is in style for the season at a store such as Coach. These same stores can also be found at an outlet mall. Outlet malls are typically found away from the suburbs. As a resident in Upstate New York, the closet outlet mall for me to shop at is over an hour and a half away. The products that are found at the outlet stores are much cheaper than those that you would find at your local mall. These products are generally not in style either. They are most likely a season or two older which is why Coach and Guess are able to sell them at a lower price. Such retailers are aware that their customers who have more disposable income to spend on luxury goods are willing to spend more money on handbags of quality as well as convenience. Most malls are distanced not too far from each other. Most people don’t want to drive far to an outlet mall just to grab a handbag. It’s almost as if outlet malls are rewarding those who drive the extra distance by offering a cheaper priced item.

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